Tuesday, March 12, 2013

What Happens When Governments Ignore Tomorrow and Borrow to Spend Today ... The Effects of Can Kicking are Never Good

We live in the now generation, and nowhere is that more true than our government institutions.

Spend and borrow and spend and borrow and spend and borrow some more has all too often become the norm for government officials, and it's a dangerous and unsustainable norm at that. And we're all learning that valuable but painful lesson now.

The responsible idea of properly accounting for today's obligations that inevitably will come due tomorrow is all too ignored in today's can kicking world of government knows best. But when that can has been kicked one too many times and the lenders cry foul, that's when all hell breaks lose. And that's when the fat lady's singing can no longer be ignored.

For example, we hear about the country's $16 trillion in debt, but we don't hear much at all about the other $100 trillion in future liabilities. The future is ignored -- for now. Unfortunately for future generations, that future can be ignored and the borrowing spree can continue. But not indefinitely.

As current examples of the live NOW mentality, we need only to look at Illinois and its unfunded pension liabilities, which we wrote about yesterday. (See also SEC Says Illinois Hid Pension Troubles.)

Or for another example of ignoring the future effects of today's behaviors, we can look at the story of government officials' gross negligence and even fraud which is told in For Detroit, a Crisis Born of Bad Decisions and Crossed Fingers:

"This city was already sinking under hundreds of millions of dollars in bills that it could not pay when a municipal auditor brought in a veteran financial consultant to dig through the books. . . . he was stunned by what he found: an additional $7.2 billion in retiree health costs that had never been reported, or even tallied up.       
“The city must take some drastic steps,” the consultant, John Boyle, warned the City Council in delivering his report at a public meeting in 2005. Among the options he suggested was filing for bankruptcy.
“I thought all hell would break loose — I thought the flag would finally be raised,” Mr. Boyle recalled in an interview last week. But his warning drew little notice. “It was utterly astounding,” he said.
The financial crisis that has made Detroit one of the largest cities ever to face mandatory state oversight was decades in the making, a trail of missteps, of trimming too little, too late, of hoping that deep-rooted structural problems would turn out to be cyclical downturns that might melt away as the economy picked up. . . .
“This was bad decisions piled on top of each other,” Gary Brown, the Detroit City Council president pro tem, said the other day. “It has all been a strategy of hope. You keep borrowing where every piece of collateral is already leveraged. You have no bonding capacity — you’re at junk status.

. . .  as auto jobs moved elsewhere and the region aged, Detroit’s labor costs — retiree health care costs, especially — ballooned.
At the same time, officials papered over growing deficits with more borrowing. Finally Detroit’s legal debt limit, which is linked to the total value of real estate in the city, fell when the mortgage bubble burst and property values plunged. Today the city says its debt limit is $1 billion, and it has effectively lost its ability to issue debt in the name of its taxpayers.
When a city cannot borrow, it cannot function; New York City showed that in 1975, Cleveland in 1978. But even as Detroit has approached the critical limit, some city leaders have seemed unaware, quarreling over smaller, symbolic issues like whether to lease a city-owned park to the state. . . .
The big structural imbalance was hard to see building up, because until 2008, when a new accounting rule took effect, cities like Detroit were not required to keep track of their workers’ lifelong health care bills. That is why Mr. Boyle found a $7.2 billion promise that no one knew about. Detroit’s general-obligation debt to its bondholders, by contrast, was a little less than $1 billion that year, safely within the city’s legal debt limit, then $1.4 billion.
But while the numbers are particularly grim here, the basic story line is hardly unique. The same path, long and slow, can be found from Providence, R.I., to Stockton, Calif.
To preserve cash, the city resorted to increasing its workers’ future pensions at contract time, instead of raising their pay. That helped balance the immediate budgets, but set up a time bomb sure to explode as more workers retired.
The cost of the retirees’ pensions also grew because of an inflation-protection feature that compounds every year. Detroit cannot renege on paying the benefits, at least outside of bankruptcy, because the State Constitution makes it unlawful to reduce pensions after public workers earn them.
By the 2000s, Detroit was borrowing to solve budget shortfalls. . . .
In recent years, city officials have made deep cuts in staff and operations, leaving residents complaining of darkened streetlights, slow police response times and bus delays. But while cutting workers can help reduce the current year’s costs, it moves many of those people into the ranks of retirees, putting heavy long-term pressure on Detroit’s two public pension funds. . . .
None of the decisions, experts here say, will be simple, and some wonder whether Detroit can be saved at all. Some 700,000 residents now live in this vast 139-square-mile city that once was home to nearly two million people. That number may fall to close to 600,000 by 2030 before the population begins to rise again, one regional planning group projects. By pushing costs into the future while its population is shrinking, Detroit has left the people least able to pay with the biggest share of its bills.
“Detroit is a microcosm of what’s going on in America, except America can still print money and borrow,” Mr. Boyle said."
Summing Up
The ability to borrow against the future is a good thing -- until it isn't.
It's a good thing when used properly as an investment in the future, but it's almost always a bad thing when it's used for consumption in the present. Can kicking, in other words.
When the can is kicked repeatedly by borrowing against the future, at some point the debts pile up to the point where future borrowing is impossible. Then the walls come tumbling down.
The key, of course, is not to let it get to that breaking point.

But when government officials continually ignore the future effects of their reckless spending, the inevitable day of reckoning gets closer and closer.
Sadly, that's exactly what has happened in much of the world. It's also what has happened in Detroit and many other American cities (and a few states, too). 
There are no government bailouts possible for a society that borrows itself to the breaking point.

That's because in the end, the society is the government.
That's my take.
Thanks. Bob.

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